How electricity powers the revenue of municipalities

Electricity has become an emotionally charged subject thanks to Eskom’s problems, the resultant load-shedding and the price hikes consumers have experienced over the past few years.

The National Energy Regulator of South Africa (Nersa) has approved a guideline increase of 12.2% for municipalities, which came into effect at the beginning of this month, over and above the hike Eskom has been granted.

You’d expect the big metros to derive a substantial chunk of their income from selling electricity – and they do, most of them get between 30% and 40% of their total revenue from it. But some of the smaller municipalities earn nearly half of their total income from electricity sales: uMhlathuze (KwaZulu-Natal), Langeberg (Western Cape), Umtshezi (KwaZulu-Natal), KwaDukuza (KwaZulu-Natal) and Tlokwe (North West). In fact, 52 municipalities earned at least a third of their income from electricity service charges. Nearly half of them are in Gauteng and the Western Cape (you can see where these municipalities are clustered, they are shaded red and dark pink on the map at the top of the page).

Recently, municipalities have come under fire because of the failure of some of them to pay Eskom on time for the bulk supply of electricity.

Eskom’s acting chief executive, Brian Molefe, suggested in April its debt of R25-billion could be reduced if Eskom could bypass defaulting municipalities and provide electricity directly to those households. He said the idea of bypassing municipalities should be an incentive for municipalities to pay on time.

Statistics SA showed, using 2013 financial year numbers, how the financial viability of many municipalities “could be tenuous” if they could not resell power bought in bulk from Eskom.

Even though Eskom generates 97% of the country’s electricity, municipalities play an important role in its distribution to households and businesses – slightly more customers buy their electricity from a municipality (52%) than from Eskom (47%), according to figures published in the treasury’s 2011 Local Government Budgets and Expenditure Review.

Combining all the municipalities, electricity sales make up just under a third (28.9%) of their total income, according to figures released by StatsSA in June for the 2013-2014 financial year.

Other revenue comprises fines, licences and permits, public contributions and donations, gains on the disposal of property, plant and equipment, rentals received, bad debts recovered, among others. (Source: StatsSA)

But all is not equal among the municipalities. The Mail & Guardian calculated the percentage income generated from electricity sales for each municipality for the 2013-2014 financial year. (See map at top of story)

Of the 234 local and metro municipalities, 177 derived income from the sale of electricity; for 52 of them it accounted for more than 30% of their income. But 57 earned no income from electricity at all. Only 20 of those municipalities that sell electricity have been taken to task by Eskom for not paying their bills this year.

Eskom was owed R4.67-billion in arrear debt, it said in a statement in April, of which R3.68-billion was owed by the 20 top defaulting municipalities. But, ironically, Soweto, which receives its electricity directly from Eskom, owes the utility R8-billion, Molefe told Parliament. This debt is bigger than that of the top-20 municipal defaulters combined, energy expert Chris Yelland noted in a recent article.

Electricity reticulation is a municipal responsibility, according to the Constitution. But, in practice, both Eskom and municipalities distribute electricity to consumers. “This creates a complex situation in some municipalities, where different areas are served by different service providers, with different tariff structures for consumers and revenues going to different institutions,” the treasury stated.

“It also creates confusion among consumers about whom they should hold accountable for the delivery of electricity services.”

Nersa regulates the electricity industry and approves the electricity tariffs charged by both Eskom and the municipalities. Eskom’s price increases are determined separately from the municipal guidelines and municipalities can apply to Nersa for an increase above the guideline.

“Even though Eskom charges wholesale and the municipality adjusts this charge to retail, the difference is not profit in the true sense of the word because a lot of it goes into hidden costs,” said Roger Lilley, editor the journal Energize.

When municipalities charge for electricity they need to factor in “unrecoverable costs” such as the upkeep of infrastructure, the running of the electricity department, salaries and the cost of running street and traffic lights, said Lilley.

In a bid to clarify what he described as the “significant public misperception and confusion” over domestic electricity tariffs, Yelland compared electricity prices in six metros with the prices charged by Eskom.

It was clear from his analysis that electricity pricing is complicated: different areas have different population densities, income groups, types of consumer and consumption patterns. But it’s also clear that Eskom was not always the cheapest.

The government had planned to resolve the confusion over tariffs and accountability for service delivery by establishing six regional electricity distributors that would take over the assets and functions of Eskom and the municipalities. But the plans were scrapped in December 2010.

According to the treasury, the uncertainty created by the proposed restructuring meant that many municipalities neglected to maintain and invest in their electricity infrastructure because they had expected it to be transferred to a regional electricity distributor.

In 2008 an estimated R27.4-billion was needed to upgrade the transmission infrastructure.

“Well-capacitated municipalities with established distribution networks in relatively wealthy areas can use the sale of electricity to generate significant revenue that they use to help fund other municipal activities,” the treasury stated.

In poorer areas, municipalities often do not have the technical capacity or funds to connect households to the grid and there is less scope to generate revenue from supplying electricity to these households. Eskom has often taken on that role with the help of government funding, said the treasury.

Both municipalities and Eskom have to contend with customers who do not pay their bills, and losses from illegal connections. But even so, for many municipalities, distributing electricity is a useful source of revenue and, usefully, it is the only basic service municipalities can cut off to penalise households that don’t pay their municipal bills.

For Eskom’s 20 defaulting municipalities, things are complicated, however. But the fault does not lie solely with the municipalities, said Lilley. “Eskom has a very good administrative department and should never have allowed the system of defaulting to have gone on for so long.”

Click here to see the methodology used for this story.

Graphics were added to this article on July 20 2015.